STRENGTHS

WEAKNESSES

Highly dependent on a large financial sector

Economy vulnerable to eurozone economic conditions

Long-term budgetary impact of an ageing population

Risk assessment

Slower growth in 2019

The poor performance in 2017 gave way to a more marked recovery in growth in 2018, as the upturn in the financial sector and continued strong domestic demand contributed to the expansion of activity. The rise in the employment rate, which is approaching the peak seen in 2007, and growth in inflation-indexed wages contributed positively to the increase in consumption. Investment continued to benefit from the lower tax burden on companies and favourable financing conditions. Although domestic demand is expected to remain robust, growth should slow slightly in 2019. Non-financial services and industry are expected to remain on a positive trend but will likely be affected by tight labour market conditions. The employment rate is expected to go up by 3.4% in 2019, with a significant increase for cross-border workers. Due to the importance of the financial sector in GDP, the Luxembourg economy remains highly exposed to the volatility of international financial markets. The financial sector accounts for 42% of value added and is mainly composed of foreign-owned banks (subsidiaries of European banks) and financial institutions with an asset management focus. In 2019, the increase in uncertainties related to trade tensions, the Italian debt problem, tighter US and eurozone monetary policies, as well as volatility in emerging markets, are all factors that could negatively affect investment fund returns, depressing growth. At the same time, the Luxembourg stock exchange may benefit from post-Brexit relocations by financial institutions.

Slight reduction in public and external surpluses

As in 2018, the budget surplus is expected to continue to decline in 2019, reflecting lower budgetary revenues and a slight increase in capital expenditure. Following the parliamentary elections in October 2018, there are unlikely to be changes in the budgetary framework and the measures decided in previous years should continue to take effect. Faster growth in 2018 partially offset the impact of 2017 tax reforms aimed at boosting the competitiveness of the Grand Duchy and improving tax fairness. The same measures are expected to lead to a decline in budgetary revenues of 0.8% of GDP in 2019 and 2020, but they will continue to be partly offset by the increase in the employment rate. At the same time, the decline in VAT revenues on e-commerce activities is expected to reduce budget revenues by 0.1% of GDP. These revenues should thus amount to around 45% of GDP over the year. Expenditures are also set to stabilise in 2019 due to a slight decrease in capital expenditure. The structural budget balance is therefore expected to remain in surplus in 2018 and 2019, with a structural surplus of 1.5% of GDP and 1.3% of GDP respectively, i.e. above the medium-term budgetary objectives. Although the public balance is showing a surplus, public debt is expected to increase in 2019due to the carryover of social security surpluses in the reserve fund for the general pension scheme.

Although it is declining slightly due to a higher energy bill, the current account balance is expected to continue to post a large surplus in 2019. The deficit in the trade and income balances due to cross-border transfers is expected to remain largely offset by the sizeable surplus in the balance of services resulting from the activity of financial corporations.

The coalition renewed in 2019

Following the October 2018 elections, the Christian Social Party (CSV) led by former minister Claude Wiseler remains the country’s leading political party with 28% of the vote. But with 21 seats out of 60, it is far from enjoying a majority and will remain stuck on the opposition benches, where it has sat since the snap elections in October 2013. With 31 seats, Xavier Bettel’s outgoing coalition returned to power after a deal was made in December 2018 to lock in the DP-LSAP-Déi Gréng government’s programme for the next five years. The Socialist Party (LSAP) and the Liberal Party (DP) obtained 18% and 17% of the votes respectively. The big winner of the elections was undoubtedly the Green Party, which took 15% of the votes, 5% more than in the previous elections. The Pirate Party also made its parliamentary début with its first two elected representatives, while the populist right-wing ADR party consolidated its position with four seats instead of three.